Comments Regarding Electric Commerce
Page 1
MEMORANDUM
TO:Advisory Commission on Electronic Commerce
FROM:John F. Fischbach, City Manager
City of Fort Collins, Colorado
P.O. Box 580
Fort Collins, Colorado 80522-0580
Telephone: 970-221-6507
Electronic Mail:
SUBJECT:Written Comments Regarding Electronic Commerce
Federal Register: August 13, 1999, Volume 64, Number 156
EXECUTIVE SUMMARY
To maintain public confidence in state and local tax structures, it is important for the Congress take all actions necessary to provide a level playing field for businesses and citizens. Federal legislation should not continue to provide a protected class of retailer at the expense of main street businesses and other taxpayers.
In the following comments, I cover five topics regarding sales and use tax being applied on sales made through the Internet or mail order catalogs. The themes are fairness, loss of local and state revenue necessary for basic services, the need for revenue diversity, the existence of methods to address the tax remittance process, and the urgency of the situation.
The foremost criterion for any tax system is that it be fair. By allowing Internet and catalog businesses to avoid the responsibility to collect and remit sales tax to the appropriate taxing jurisdiction is not fair.
State and local governments are now losing tax revenue due to Internet and mail order catalog sales. The amount of loss is growing rapidly. In five years, the amount of the loss may amount to 5% of total municipal government revenue. This means a real and substantial reduction in the ability to provide basic services.
Colorado cities and towns have relied on the sales tax as a revenue source for all the right reasons. The tax is elastic to economic growth, the most popular of all taxes with the voters, and it closely links the taxpayers, businesses, and the local government into the community decision making process.
Considering recent discussions with private sector vendors, the technology to track and coordinate reporting responsibilities for Internet and catalog sale vendors exists. Technology can help vendors sort, report, and pay their tax liabilities.
Time is of the utmost essence. The Internet sales medium is growing at such a rapid pace that it will only be more difficult to impose a fair and equitable tax system in the future than it is now.
Introduction
As the City Manager of and on behalf of the City of Fort Collins, I would like to make a few brief comments about the issues that the Advisory Commission on Electronic Commerce (the “Commission”) is charged to study. As provided for in Public Law 105-277, Congress assigned the Commission with the responsibility to conduct a thorough study on taxation and tariffs on transactions using the Internet and Internet access. I have summarized my comments into the five headings below.
Fairness
The foremost issue in the discussion about the taxation of goods sold through electronic commerce is treating all types of sales, regardless of the type of seller, equitably. Fairness in taxing systems leads to public confidence and willingness to pay for necessary public services. Tax systems fraught with complexity due to special interest exemptions creates a lack of trust and an incentive for other taxpayers to find as many means possible to avoid payment of taxes.
Loss of Revenue to Local and State Government
Local and State Governments have become increasingly dependent on sales tax as a major source of funding for necessary and desired services. In Colorado, municipal governments have chosen the sales tax as the primary source for supporting general governmental services, including police, fire, transportation, libraries, parks and recreation, and all the administrative services required to run a municipal corporation. In almost all cases, these sales tax rates have been approved by voters. The voters seem to accept the sales tax as the best method by which to fund local government. As a revenue source, the sales tax tends to keep up with a growing economy. Surveys by the Advisory Commission on Intergovernmental Relations document that the sales tax is far more palatable than either the property tax or income taxes.
For 1998, the City’s Finance Department has estimated that the loss of sales tax revenue due to Internet sales was approximately $220,000. Loss of local sales tax revenue due to catalog sales is estimated to exceed one-half million dollars. By 2003, it is estimated that the loss of local revenue due to Internet sales will be about $5 million, twenty-five times last years estimate in just five years. In a rapidly growing community like Fort Collins, this will likely cause severe service reductions because of lack of viable revenue replacement alternatives. City income taxes are unconstitutional in Colorado. Large property tax increases, viewed as unpopular due to their regressive nature and generally inelastic to overall economic growth, probably would not be supported at the polls.
Despite a strong local economy (Fort Collins ranked third in economic strength of all metropolitan statistical areas in a recent study), the City is experiencing some difficulty in meeting the basic service needs of the community. For example, our police officer per thousand residents ratio is among the lowest for cities of comparable size. If Internet and mail order sales were paying their full and fair share in 1998, the City could have supported nine additional officers. If Congress allows the erosion of the municipal sales tax base to continue by extending the moratorium on Internet sales and continuing the tax exempt status on mail order sales, municipalities may have to reduce the support of public safety programs and other basic municipal services.
The federal-state-local tax structure has developed over many years and in an economic sense, it has found an appropriate and acceptable equilibrium. If electronic commerce continues to be exempt from paying its equitable share of the sales tax, the equilibrium will be disrupted, service levels reduced, and correspondingly, the quality of life in many cities will decline.
Need for Revenue Diversity
The International City and County Management Association (ICMA) and the Governmental Finance Officers Association (GFOA) have published research studies indicating that local governments should strive to diversify their revenue sources. Within this context, a substantial portion of the revenue mix should be elastic – as the economy and the population of a city grow, a portion of its revenue base should be able to keep pace with the growth. For cities that are unable to levy an income tax, the sales tax is the best option for many cities to meet this objective. To allow certain types of sales (electronic commerce and mail order catalog) to avoid the incidence of the tax undermines the objectives of revenue diversity and fairness for all levels of government.
Ability to Track Electronic and Other Remote Sales Exists
Recently, city representatives in Colorado have met with a firm that has the ability to track and report electronic sales to multiple tax jurisdictions. We have also met with a private firm that sells products over the Internet and through mail order that is voluntarily willing to set up a system to meet the diverse sales tax rates and bases that exist in Colorado. The technology that has given us the Internet has also provided the ability to keep up with sales over the Internet or through mail order. We only need the direction and will to use this technology to solve the problem. Technology can be used to improve equity. If it can be done voluntarily in Colorado, it should be able to be done across the nation.
Solution Needed Soon
The problem of lost sales tax revenue due to the extraordinary moratorium for Internet sales is serious and is growing in magnitude every week. If the problem and equity issues are not dealt with soon, the gap will become wider and wider and more difficult to solve. The Internet is not a fledgling that requires protection or special treatment. It is one of the most profitable aspects of the new global economy. It should be expected to play by the same rules as do its main street competitors.
Summary and Conclusion
Internet and catalog sales should be subject to the same type of sales tax regulations as main street retailers have to follow. There is a strong relationship between the purchasers of goods, where they live, and the local and state governmental services they receive. The full capabilities of our technologically based society should be focused on ensuring equitable tax treatment by all types of sales, not using technology to assist consumers and taxpayers avoid responsibility for paying for the services that they require and desire.
Checklist
1. All comments must be double spaced
2. One version should be sent electronically to
3. 30 hard copies should be sent to
Heather Rosenker, Executive Director
Advisory Commission on Electronic Commerce
3401 North Fairfax Drive
Arlington, VA 22201-4498
4. For comments exceeding two pages, prepare an executive summary not to exceed two pages